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You can’t keep a good dividend down

Uh oh…

Look out below, Foolish investors.

As I write, the S&P/ASX 200 Index has fallen 1.25% today, now trading at 5,225, dragged down again by the banks.

Not even a belated jump in the big miners, BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) could save our bacon, the latter jumping more than 4% higher after it revealed it had rejected a takeover from Swiss miner and commodities trader, Glencore.

Down, down…

5,111 is the magic number to focus on. If the S&P/ASX 200 Index falls to that level, we’ll officially be in correction territory. On the bright side, after today’s tumble, it means there’s less than 2.5% to go from here.

While you might be tempted to hit the panic buttons, I’m doing the opposite. I’ve seen it all before.

Selling begets more selling, for no other reason than fear.

This remains an orderly sell-off, so far, although today, there’s a whiff of uneasiness in the air.

If the selling intensifies, expect worse. The S&P/ASX 200 index trading below 5,000 is a very real possibility.

Prepare yourself now, both mentally and physically.

Mentally, knock a further 10% off the value of your portfolio. Know what it feels like if and when the market tanks.

It’ll hurt, for sure. But my guess, especially if you’ve ridden the gains in blue chips like the banks, Telstra Corporation Ltd (ASX: TLS) and Insurance Australia Group Ltd (ASX: IAG) up since the beginning of 2013, you’ll still be sitting pretty. More so that you’ve banked all those lovely dividend cheques along the way.

Physically, prepare NOW to deploy some of that cash pile you’ve been sitting on, either in term deposits, or because you’ve been patiently waiting for a moment just like this.

Selling is tempting when all about are panicking. DON’T be the scaredy cat.

scaredy-cat 2

Buying is difficult when you don’t know where or when the market will bottom. DO be the brave, Foolish Investor.

As I’ve previously highlighted, I’m buying now, my most recent purchase being a Motley Fool Share Advisor recommended stock that’s trading on a fully franked dividend yield of close to 5%.

And I’ll continue to buy if and when the market continues to fall. In this low interest rate environment, I’m not one for looking gift-horses in the mouth, especially shares of the full franked variety.

Someone else who’s buying is Anton Tagliaferro, respected fund manager at Investors Mutual.

Now that bank stocks have fallen a few percentage points, as quoted on Livewire, Mr Tagliaferro said…
 

“Up until two months ago they (banks) looked pretty frothy and expensive. I think at current levels they are beginning to look reasonable.”

He went on to say that National Australia Bank (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) are all due to report in the next month, and Mr Tagliaferro is expecting to see record results and healthy dividends.

You simply can’t keep a good fully franked dividend down, especially so in this low interest rate environment.

As for bank stocks, I’m neither buyer nor seller. A share price fall of a few percentage points is neither here nor there for me. It would take a MUCH bigger fall for me to get interested in adding to my family’s positions in bank stocks.

Of course, brokers might tell you otherwise. The more you trade, the more they earn, from you.

Worse, the more you trade, the bigger your chance of under-performance.

It seems my “scaredy cat” email of yesterday struck a chord with many of your fellow Motley Fool readers, starting with this quote from my colleague Bill Mann…

“Many investors sell after they experience losses, and buy back once the market recovers. This dooms their portfolios.”

Such behaviour is investor suicide, on the grandest of scales, leading to financial devastation.

Not to mention all the heartache, the stress, the agonising over each investment decision, the second guessing yourself at every turn of the market… all for what?

To see your broker riding around in his BMW Convertible while your portfolio is confined to almost guaranteed under-performance…

Successful investing really is simple. As I said yesterday…

Find the best businesses. Buy them at a good price. Own them for a long time. Add more money regularly. Don’t panic.

All that said, I’m not sugar-coating the rough ride the S&P/ASX 200 Index has endured over the past few weeks… and today too.

Conveniently, we can put blame on fickle offshore investors, who are pulling their money out of the Australian market because the Aussie dollar is falling and US interest rates are set to rise.

Never under-estimate the madness of crowds… or of fickle offshore investors.

Blind Freddy and his guide dog should have known the Aussie dollar was set for a fall. Even little old me picked that one up.

Let me see…

Australia

Unemployment — 6.1% and rising.
Interest rates — 2.5% and going nowhere.

United States of America

Unemployment — 5.9% and falling.
Interest rates — 0% and can ONLY go up.

None of this should have come as a surprise… except, it seems, to fickle offshore investors, blindly chasing yield, regardless of the underlying fundamentals. They should jump on a plane and come visit the luck country and see just how expensive things are here for themselves.

Now they are taking flight, but of a different kind.

Just at a time when the lower Aussie dollar means they are able to get MORE ASX stock for their buck than they were just a few short weeks ago (when they were presumably happy buyers), and dividend yields are HIGHER now that stock prices have fallen, they are pulling their money out of our market.

With behaviour like this, you can quickly work out why the majority of fund mangers under-perform the market.

They too are not immune to the wealth destroying “buy high, sell low” syndrome.

My guess is they are selling out because they fear the Aussie dollar has got further to fall.

A case in point is Thomas Clarke, a portfolio manager and asset allocation specialist based in the London office of $62 billion funds management house William Blair & Company.

As reported in The Sydney Morning Herald, Mr Clarke recently said the Aussie dollar will fall as far as US75 cents.

His rationale? Probably a far more complex version of my Australia vs USA summary above. But he probably gets paid a whole lot more than me, too.

As to where US75 cents came from is anyone’s guess, including Mr Clarke’s, but given he is short the Aussie dollar, it’s more likely than anything to do with him talking his own book.

Always one to look on the bright side, all this doom and gloom brings great opportunity for the domestic investor — yes, that’s you and me!

Firstly, given we’re not beholden to anyone except ourselves, we can focus on the long-term rather than chasing monthly or quarterly performance goals. Think three years ahead, not three days.

Secondly, lower stock prices today means the prospects of capital appreciation sometime in the future are greater.

Thirdly, as share prices fall, dividend yields rise. And dividends are far more stable and predictable than share prices. Plus, they are cold hard cash, in your pocket.

And fourthly, with the Aussie dollar still riding high, even after its recent falls, US stocks are still attractive.

There’s nothing like having multiple ways to profit.

Speaking of profit, Contango Asset Management portfolio manager Shawn Burns was yesterday quoted in the AFR as saying…

“We continue to be positive on the market. Earnings growth is solid and interest rates remain at low levels, although more volatility is expected as the United States Federal Reserve normalises monetary policy.”

In my investing world, volatility = opportunity. Take it. Make your money a scaredy cat free zone.

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Bruce Jackson has an interest in  Telstra, Westpac, Woolworths, Berkshire Hathaway, ANZ and BHP Billiton

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